The Preliminary Knight Capital Math - Why Pay More for KCG Than C or BAC?
August 6, 2012 Leave a comment
Knight Capital (thankfully) lives to see another day. The post-investment tangible book value per share seems to be roughly $2.85/share. You can buy Citigroup or Bank of America for just north of 1/2 tangible book; why buy KCG at a premium to BAC or C?
Here’s the Initial Math:
NEW SHARE COUNT
- $400 million capital raised (in the form of convertible preferreds);
- Which is Convertible @ $1.50/share for 70% of KCG;
- Implies 266.7 million new shares in the event the new stakeholders convert;
- Diluted weighted avg shares PRE-capital raise = 92.9 million shares
- So Total New Shares = 359.5 million
TANGIBLE BOOK VALUE (as of 6/30/2012 unless otherwise)
- Equity = $1.50 billion
- Goodwill = $0.34 billion
- Intangibles = $0.09 billion
- Goldman Sachs Liquidation Fee = $0.04 billion (This is a guess)
- Tangible Book Value = $1.02 billion
ADDITIONAL CONSIDERATIONS
- Though KCG is not a bank (nor a “TBTF” entity), the fact it could go out of business in less than one hour suggests the risk profile eerily resembles a Citigroup or Bank of America…
- Did talent at KCG leave? Or are they leaving?
- What’s the legal liability in $ terms?
- Isn’t the earnings impaired for the forecast-able future, due to loss of customers, loss of credibility, etc.?
- Fixing mistakes is operationally costly… the unforeseen operational costs of improving code, compliance, etc. also weigh against future earnings, do they not?
- KCG has senior secured cash convertible preferred with an initial strike of about $21 due 2015. Face value is $375 million and they make payments biannually at 3.5%. Is there a change of control issue here?
- How much did the emergency 1-day credit line for last Friday cost Knight?
- It would seem in Knight’s interests to do a 10:1 reverse stock split… Citigroup style.
- Speaking of Citigroup or Bank of America … C and BAC trade just north of 1/2 tangible book value… WHY PAY MORE FOR KCG THAN C or BAC?
Disclosure: Short KCG via common equity and put options .
